Tax treatment of the insolvent estate: What happens if the estate includes a business undertaking?

Last week we wrote an article on the tax treatment of an insolvent estate. Now we're going to expand on the matter, more specifically on the tax treatment if the estate includes a business undertaking.

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If your estate prior to sequestration included any business undertaking which is subsequently transferred into the insolvent estate as a consequence of your sequestration, the following provisions will apply to you…

The following will happen when the insolvent estate includes a business undertaking:

#1: Any assessed loss incurred prior to sequestration can be set off against income accruing to the insolvent estate.

#2: Debts included in taxable income prior to sequestration can be claimed as bad debts in the insolvent estate if they become irrecoverable.

#3: Capital allowances, such as wear and tear provisions applicable to fixed assets, can continue to be deducted in the insolvent estate.

#4: Any amounts that were written off as bad debts prior to the sequestration and are subsequently recovered will form part of the taxable income of the insolvent estate.

#5: Expenses and allowances that are claimed prior to insolvency may be recouped in the insolvent estate if applicable.

#6: The Practical Tax Loose Leaf Service says although assessed losses arising prior to sequestration can be carried forward into the insolvent estate, any balance of an assessed loss that remains at the time the insolvent estate is finally wound up, is forfeited.

#7: Capital gains and losses determined according to the Eighth Schedule to the Income Tax Act, other than those arising from a business undertaking, can be carried forward to the insolvent estate.

If you missed last week's article on how an insolvent estate is taxed, click here.

There you have it. Knowing how an insolvent estate is taxed will bring you a step closer to understanding the tax consequences of insolvency.

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